MIKUNDA, COTTRELL & CO.Certified Public Accountants and Consultants

3601 “C” Street, Suite 600Anchorage, Alaska 99503

(907) 278-8878

GASB Update

GASB Update

Recent Pronouncements

• 56 – Codification

• 55 – Hierarchy of GAAP

• 54 – Fund Balance Reporting

What’s on the horizon?

GASB 56

Codification of Accounting and Financial Reporting Guidance Contained in the AICPA

Statements on Auditing Standards

Effective date immediately upon issuance

April 16, 2009

GASB 56 Codification of Audit Standards

• Codifies GAAP into a single reference source

i.e. – the Codification

• Incorporates certain existing guidance (Auditing Standards) into GASB standards:1. Related Party Transactions

2. Subsequent Events

3. Going Concern Consideration

GASB 56 Codification of Audit Standards

Related Party Transactions:• Disclosure of RPTs in financial statements• Disclose the substance, not the form of the RPT

– Interest free loans• Some difficulty to determine when a transaction might not have occurred or what the substance would have been with an unrelated party• Compare government to government not to private sector

GASB 56 Codification of Audit Standards

Subsequent Events:• A transaction or event between the financial statement date (Statement of Net assets) and the date of issuance

Adjustment (recognized event)vs.

Disclosure in the footnotes (non-recognized event)

GASB 56 Codification of Audit Standards

Subsequent Events, continued:

Recognized events:• Events after year end that provide evidence about

conditions that existed at balance sheet date• Should adjust the financial statements accordingly

- Settlement of an estimated liability

- Bankruptcy of customer with large AR balance

GASB 56 Codification of Audit Standards

Subsequent Events, continued:

Non-recognized events:• Conditions after the financial statement date• No adjustment needed, but significant events require disclosure

- Creation of a new component unit

- Quoted market value fluctuations

GASB 56 Codification of Audit Standards

Subsequent Events, continued:• Adjust or disclose? Determination involves:

– Professional judgment

– Understanding the event, the facts, and conditions

• MD&A – may need to discuss

GASB 56 Codification of Audit Standards

Going Concern:

• Is there a doubt in the ability to continue for at least 12 months? Consider

- Negative trends (recurring losses, negative cash flow) - Financial difficulties (debt defaults, inability to obtain credit)

- Internal matters (labor difficulties, commitments)

- External matters (legal issues, legislation)

GASB 56 Codification of Audit Standards

Going Concern, continued:

Note disclosures & MD&A disclosures:• Events, conditions, and effects• Officials evaluation of those conditions/effect• Discontinued operations• Recovery plans

GASB 55

The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments

Effective date immediately upon issuance

April 2, 2009

GASB 55 GAAP Hierarchy

What is the GAAP Hierarchy?

• Establishes the order of priority of pronouncements for accounting and financial reporting guidance

• Previously GAAP hierarchy was spelled out in Auditing Standards – this statement sets the hierarchy within the GASB authoritative literature

GASB 55 GAAP HierarchyPriority Order1) GASB Statements & Interpretation (now officially

codified)2) GASB Technical Bulletins & AICPA Industry Audit &

Accounting Guides where applicable to state and local governments

3) AICPA Practice Bulletins where applicable to state and local governments; Consensus position papers where organized by GASB

4) Implementation Guides published by GASB and widely recognized/prevalent practices in state and local governments

GASB 54

Fund Balance Reporting and Governmental Fund Type Definitions

Effective date

Periods beginning after

June 15, 2010

(eg Y/E June 30, 2011)

GASB 54 Fund Balance Reporting

• Applies only to governmental funds

• No change for the government-wide statements

• Provide clearer hierarchy of fund balance classifications based on constraints

• Better consistency

• Clarifies governmental fund types

GASB 54 Fund Balance Reporting

• Current rule for fund balance:- Reserved- Unreserved

Designated Undesignated

- Reserved – not available to spend in current year and/or legal restrictions more narrow than the fund

GASB 54 Fund Balance Reporting

• Establishes 5 categories- Nonspendable- Restricted- Committed- Assigned- Unassigned

GASB 54 Fund Balance Reporting

• Establishes 5 categories

- Nonspendable Similar to current- Restricted reserved- Committed

unreserved- Assigned designated- Unassigned undesignated

GASB 54 Fund Balance Reporting

Nonspendable Fund Balance• Nonspendable form

- inventories, prepaid items, loans

• Legally or contractually required to be maintained intact

-corpus of a permanent fund

GASB 54 Fund Balance Reporting

Restricted Fund Balance• Amounts constrained for specific purposes

- Imposed by external parties

- By Law

- Enabling legislation legally enforceable by external parties

• GASB 34, as amended GASB 46 (essentially same definition)

GASB 54 Fund Balance Reporting

Committed Fund Balance• Constraints for specific purposes imposed by:

- Formal action of highest decision making authority

- Constraint can be removed only by the same formal action

- Action must occur prior to end of fiscal year NO RETROACTIVE COMMITMENTS Actual calculation can be performed post year end

GASB 54 Fund Balance Reporting

Assigned Fund Balance• No formal constraints, but amounts intended to be used for specific purposes

– The intent of the government should be expressed by a body or official with authority delegated by the governing body

• All residual fund balances outside the general fund are “assigned” (SRF, DSF, etc.) • Appropriations of existing fund balance are assigned

GASB 54 Fund Balance Reporting

Assigned Fund Balance, continued

• Should not assign fund balance if doing so causes a deficit in the unassigned fund balance

• This includes the appropriation of fund balance to eliminate a projected subsequent year budget deficit

GASB 54 Fund Balance Reporting

Unassigned Fund Balance• The “leftover” classification for the general fund

• No specific restrictions, commitments, assignments, and has not be assigned to other funds

• Reported ONLY in the general fund (except negative balances in other governmental funds are also reported as unassigned)

GASB 54 Fund Balance Reporting

Need to identify classifications• Fund balance should depict the nature of the net resources that are reported in a governmental fund

• Requires the government to formulate policies dictating how it considers which fund balances are spent when an expenditure is incurred for purposes for which multiple fund balance types are available

- Restricted vs. unrestricted

- Unrestricted types -- No policy?

GASB 54 Fund Balance Reporting

Fund deficits

If expenditures incurred for a specific purpose exceed the restricted, committed, and assigned balances for the same purpose, a negative residual amount is produced. Amounts assigned to other purposes should be eliminated so no deficit exists, if possible. A unassigned deficit may exist after this procedure.

• Cannot report deficits in restricted, committed, or assigned

• Cannot assign fund balance causing a deficit in unassigned(Looking forward to the implementation guide!!)

GASB 54 Fund Balance Reporting

Reporting and Disclosures• Level of detail disclosures may be reported on the face of the statement or in the notes (or a combination)

• Nonspendable by type

• Restrictions by purpose

• Commitments and assignments by major purpose

GASB 54 Fund Balance Reporting

• Nonspendable – Inventory• Restricted for – Debt Service Reserve• Committed to – Education• Assigned to – Fire Station Construction• Unassigned

GASB 54 Display Exhibitsource: GASB 54 official statement

GASB 54 Aggregate Exhibit source: GASB 54 official statement

Will require significant footnote detail

GASB 54 Fund Balance Reporting

Footnote detail and policy disclosures:• Fund balances displayed in the aggregate - detail should be disclosed in the notes

• Committed Balance – highest level of decision making authority and the formal actions required

• Assigned Balance – the governing body or delegated official and policy to establish this authority

• Multiple balances exist – how are amounts identified to have been spent?

GASB 54 Fund Balance Reporting

Encumbrance confusion• Encumbrances should not be shown as a separate

“category” within the restricted, committed, or assigned categories.

• However, “individual encumbrances” may meet the test for separate identification by purpose

• Significant encumbrances should be disclosed in the notes by major funds and nonmajor funds in aggregate with other significant commitments

GASB 54 Fund Balance Reporting

Encumbrances at year end

Fire Truck (council action 2009-24) $350

Parks & Rec Equipment (PO) 150

Police Dispatch Contract (PO) 100

Total encumbrances $600

GASB 54 Fund Balance Reporting

Pre-GASB 54 (Current Rules)

Fund balance:

Reserved – encumbrances $600

Unreserved:

Designated $XXX

Undesignated $XXX

GASB 54 Fund Balance Reporting

Post-GASB 54Fund balance: Nonspendable – Inventory $XXX Restricted – Debt Service $XXX Committed – Encumbrance $350 Assigned – Encumbrance $250 Unassigned $XXX X

GASB 54 Fund Balance Reporting

Post-GASB 54Fund balance: Nonspendable – Inventory $XXX Restricted – Debt Service $XXX Committed – Fire Truck $350 Assigned: Parks and Rec (or Equipment) $150 Police (or Contracts) $100 Unassigned $XXX

GASB 54 Fund Balance Reporting

Encumbrances• Restricted?Only if legal restrictions (uncommon for encumbrance)• Committed?Only if approved action of council/assembly/school board

e.g. – formal vote to allocate funds to project X• Assigned?Issuance of purchase order approved through normal purchasing channels

GASB 54 Fund Balance Reporting

Stabilization policy?• Restricted or Committed - Only if meets the restricted/committed criteria

- Otherwise, unassigned

- Should not be reported as “assigned”

GASB 54 Fund Balance Reporting

Stabilization policy?• Stabilization amounts that can be accessed for use in undefined or routine circumstances should not be considered restricted or committed – but should be disclosed in the footnotes

• Minimum fund balance policies – disclosed in the footnotes.

GASB 54 Fund Balance Reporting

Stabilization policy?

Fund Balance Policy: 6% debt service reserve - committed

2% working capital – unassigned

(Looking forward to the implementation guide!!)

GASB 54 Fund Balance Reporting

What challenges, if any, will this create?

- Budgeting?

- Political?

- Accounting and reporting?

- Internal controls?

GASB 54 Fund Balance Reporting

Fund Types

General Fund•The general fund should be used to account for and report all financial resources not accounted for and reported in another fund

GASB 54 Fund Balance Reporting

Special Revenue Funds•Accounts for specific revenues and the specific uses that are restricted or committed and not included in debt service or capital projects.

•Must have at least one restricted or committed revenue source which makes up a significant portion of the revenues

•Less restrictive than the current definition, but there is a lot of non-compliance with the current definition.

GASB 54 Fund Balance Reporting

Special Revenue Funds, continued•No resources held in trust for individuals, private organizations, or other governments

•Discontinue reporting a special revenue fund if the sources of the restricted or committed resources are expected to disappear

•Remaining resources are moved to the general fund

GASB 54 Fund Balance Reporting

Capital Projects Funds•Restricted, committed, or assigned for capital outlays, the acquisition or construction of capital facilities and other capital assets

•Excludes those financed by proprietary funds or for assets held in trusts for individuals, private organizations or other governments

GASB 54 Fund Balance Reporting

Debt Service Fund•Financial resources that are restricted, committed, or assigned to expenditures for principal and interest

•Used for resources that are legally mandated

•Can accumulate resources for future maturities

GASB 54 Fund Balance Reporting

Permanent Fund•Account for and report resources that are restricted so only earnings can be spent, not the principal, to support government programs

•Do not include private purpose trust funds

GASB 54 Fund Balance Reporting

Effective Date• Periods beginning after June 15, 2010

• Apply fund balance reclassifications retrospectively by restating fund balance for all prior periods presented

• Statistical section may be made prospectively

MIKUNDA, COTTRELL & CO.Certified Public Accountants and Consultants

3601 “C” Street, Suite 600Anchorage, Alaska 99503

(907) 278-8878

Questions?Contact information:

Alex Beckmanabeckman@mcc-cpa.com